Volatility in the stock markets has ratcheted up in recent weeks. Whether we’re talking about special purpose acquisition companies (SPACs), technology plays or even the bond markets, volatility seems ready for duty. That makes it harder for risk-averse investors to find safe stocks that won’t bleed your portfolio.
How bad is it right now?
Ritholtz Wealth Management Director of Research, Michael Batnick, recently wrote a blog post about why investors hate Cathie Wood. I can’t imagine why someone would hate a portfolio manager, but that’s the world we live in.
Regardless, if you’re looking for safe stocks to invest in to avoid the markets’ near-term volatility, I wouldn’t suggest you consider any of Wood’s holdings. Instead, I’ve got a list of seven safe stocks that will help you sleep at night.
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
- A.O. Smith (NYSE:AOS)
- Boston Beer (NYSE:SAM)
- Columbia Sportswear (NASDAQ:COLM)
- Corteva (NYSE:CTVA)
- Texas Pacific Land (NYSE:TPL)
- Vertex Pharmaceuticals (NASDAQ:VRTX)
To qualify, a stock has to have a market capitalization of at least $2 billion, positive free cash flow (FCF) for the trailing 12 months (TTM), and be sitting with net cash on the balance sheet.
Safe Stocks to Buy: Alphabet (GOOG, GOOGL)
Of all the stocks on this list, Google parent Alphabet is the easiest selection with a market cap of $1.4 trillion, TTM FCF of $42.8 billion, and net cash of $109.9 billion.
I guess the one downside of owning GOOGL stock if you’re an income investor is that it doesn’t pay a dividend. However, the last time I checked, the total return includes interest, capital gains, dividends and distributions over a specific period. We can argue about the virtues of dividend-paying companies at another time with another stock.
The other thing that might worry some investors is that Google is changing how it sells ads to protect its users. The company has said that it won’t invest in or use technologies that track web users’ comings and goings. As it pertains to selling ads, it will no longer sell ads based on someone’s browsing history. Instead, it will target buckets of users with similar interests.
Between Google Cloud, YouTube and its ad business, there is plenty to keep Alphabet churning out lots of free cash. Despite some regulatory issues, it remains one of the strongest businesses on the planet.
A.O. Smith (AOS)
The Milwaukee-based maker of water heaters hasn’t had an easy time in recent years — it’s got a three-year annualized total return of 1.4% — but A.O. Smith appears to have come out of its funk in 2021.
I’ve liked this company as far back as July 2012. At the time, I suggested AOS stock was a “company to own forever.” It’s up 423% in the eight years through March 16.
With a market cap of $10.5 billion, TTM FCF of $510 million, and net cash of $540 million, it’s got plenty of growth left in the tank.
In January, the company reported record fourth-quarter sales of $834.5 million, 11% over the same period in 2019. On the bottom line, it had adjusted earnings of $120.0 million, 31% higher than a year earlier. Unfortunately, its full-year numbers dropped slightly due to Covid-19.
Not to worry. Assuming its business for 2021 resembles Q4, it expects earnings to grow by 13% over 2020.
Now that my wife is in the construction business, I’ll be watching AOS like a hawk.
Boston Beer (SAM)
There was a time when all Boston Beer had to sell was craft beer. Today, it sells multiple products in several different categories of the alcoholic beverages industry and excelling at it.
The success of its Truly spiked seltzer brand — in 2020, it grew depletions [sales to the end consumer] by 37%, notching a 400-basis point increase in market share to 26% — makes me wonder how long it will be before it acquires a cannabis company that specializes in cannabis-infused beverages.
In the meantime, thanks to a one-year total return of 212%, SAM stock has a market cap of $13.6 billion, TTM FCF of $110 million, and net cash of $90 million.
While it’s not Alphabet-like free cash flow, the brewer continues to grow at a rapid pace. It expects overall depletions to grow by 40% at the midpoint of its 2021 guidance, with gross margins of 46% at the midpoint.
SAM is one of those stocks that you pick up whenever its share price corrects or seems to stall because, in the long run, it usually delivers.
Columbia Sportswear (COLM)
I remember Columbia Sportswear earlier in my career because of the ads it used to run with CEO Tim Boyle and his mom, Gertrude, who jumped into running the company in 1964 after her husband died of a sudden heart attack.
While Columbia’s made several brand acquisitions over the years — Sorel, prAna, and Mountain Hardwear — it is the Columbia brand that still accounts for 80% of its annual revenue.
Columbia has grown to become a $6.9 billion market cap with TTM FCF of $250 million and net cash of $370 million.
If you like family-run businesses, the Boyle family controls more than 50% of COLM stock. Over the past 10 years, it’s generated an annualized total return of 14.4% for its shareholders, 414 basis points higher than its apparel manufacturing peers.
While the company saw sales and earnings decline slightly in 2020, it expects them to grow by at least 18% in 2021 with operating profits of between $320 million and $340 million.
A highlight in 2020 was its e-commerce sales. In the fourth quarter, they grew by 41% year-over-year, accounting for almost 25% of its overall revenues for the year.
That’s excellent news for its omnichannel future.
If you follow this agriscience company closely, you’re probably aware that activist investor Starboard Value has Corteva under the microscope.
On Jan. 21, Starboard sent a letter to the company’s chairman, suggesting that its performance could be substantially improved, thereby delivering greater value to shareholders, including Starboard.
A Corteva shareholder for more than 18 months, the activist investor grew tired of playing nice with no results to show for its diplomacy. So, it sent a letter to the board stating that CEO Jim Collins wasn’t the right person for the job. It alleged that the executive had woefully underperformed while in charge of Corteeva.
Therefore, Starboard has nominated an entire slate of eight directors that it feels will serve all CTVA stock holders and not just those whom the board regards as loyalists.
Of course, Corteva responded that all is good in the world, and CEO Collins is doing a fantastic job in the top job.
How has CTVA stock done since the company’s spinoff from DuPont de Nemours (NYSE:DD) on June 1, 2019? It’s up 59% in the 22 months since, 15 percentage points better than the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) over the same period.
Some of this performance — CTVA is up 20% year-to-date — can be attributed to Starboard’s increasing activism.
With or without Starboard’s participation, I believe Corteva’s in the right place at the right time. Agriculture should continue to well in 2021 and beyond.
Texas Pacific Land (TPL)
At the beginning of March, I included the Texas landowner in a list of 10 stocks to buy with $1,000. Shares of Texas Pacific Land are up 44% in the 15 days since.
My argument for buying the otherwise expensive TPL stock — by expensive, I mean share price, not valuation — is that it was an excellent way to bet on the energy sector without losing your proverbial shirt.
Not only that, but its conversion to C-corporation from a trust would bring a whole new crop of institutional investors to its front door. When you’re more than 130 years old, it’s hard to maintain investor interest. Pile on a weakened energy sector in recent years and it’s a wonder it has any following.
But it does and that following’s picking up speed daily. With a market cap of $12.5 billion, TTM FCF of $265 million, and net cash of $313 million, its 880,000 West Texas acres are bound to be worth more in 5-10 years.
In the meantime, sit back and enjoy its sparkling 2021 performance.
Vertex Pharmaceuticals (VRTX)
If you’re going to assemble a group of safe stocks, it always makes sense to include a healthcare stock like Vertex Pharmaceuticals.
I know what you’re thinking: VRTX stock doesn’t pay a dividend and its price performance in recent years is anything but spectacular — down 7.1% YTD, down 0.6% over the past year and showing an annualized total return of 8.1% over the past three, almost half its biotech peers.
I hear your concerns.
However, with a $57 billion market cap, TTM FCF of $3.0 billion, and $5.7 billion net cash, I’m not sure you could find many safe stocks like Vertex in the biotech industry.
At the end of December, InvestorPlace’s Faisal Humayun suggested that VRTX was a stock to buy in January. My colleague’s argument centered on the fact the Food and Drug Administration (FDA) approved the expanded use of three of its cystic fibrosis (CF) medicines for younger groups. One of those, Trikafta, is on its way to generating $6 billion in annual sales.
On March 11, the FDA fast-tracked VX-880, the company’s type 1 diabetes cell therapy, for Phase 1/2 clinical trials. If successful, VX-880 could eliminate the use of insulin injections.
The company mentioned in its VX-880 press release that it’s working in seven disease areas at the moment, a sign that free cash flow could be about to explode higher in the next two to three years.
It’s a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.